6 July 2017
by Mark O’Byrne, Gold Core:
– Buy gold near $1,200 “as insurance” – UBS Wealth
– UBS believe investors should take advantage of gold’s first monthly decline
– “We like the insurance qualities for gold” on uncertainty
– Strong demand, weak output and low dollar to support
– Warning as North Korea tests intercontinental ballistic missile
– Launch of ICBCM is a “new escalation of the threat” and revives geo-political risks
– Syria, Qatar, Saudi, Israel, Iran risks mean Middle East remains powder keg
– Academic research points to gold’s role as a safe haven
– Gold as Safe Haven a must read for investors
Buy gold as insurance against Kim’s ‘gift giving’
Yesterday North Korea sent the US a ‘package of gifts’ for Independence Day.
Unsurprisingly the successfully tested and launched intercontinental ballistic missile (ICBM) was not well received. US Secretary of State Rex Tillerson called the move a “new escalation of the threat” to the U.S. and its allies and that “global action is required to stop a global threat.”
As the US and South Korea began military exercises in response to North Korea’s gift giving ceremony, safe haven assets rose and gold made a small rebound in the face of these escalating geopolitical concerns. Gold tends to rise on various uncertainties – whether financial, economic or geopolitical.
UBS Group AG’s wealth management unit picked up on this and said such uncertainties made a case to buy gold for its insurance qualities as reported by Bloomberg and others.
UBS Group’s comments will not come as a surprise to those who buy gold bullion as they believe in gold for it’s insurance and safe haven qualities. This ‘gut instinct’ and the lessons of history have recently been bolstered by much independent academic research (see below).
Research by academics and independent asset allocation experts alike is increasingly showing gold’s insurance and safe haven qualities. In this increasingly uncertain world, these qualities are more important than ever.
Gold is insurance against heightened uncertainty – not just US risks
It is often said that the first rule to investing is preservation of capital. For hundreds of years gold has been the insurance of choice which aids with regard this important first rule.
Anecdotal and academic research into asset allocations with gold provides evidence of the metal working to hedge investment risk and to protect capital. For example, 2010 research carried out by Dr Brian Lucey and Dr Baur found “gold is a hedge against stocks on average and a safe haven in extreme stock market conditions.”
Currently we are in an age of heightened uncertainty. Not since the Cold War has it felt like so many countries were in stand-off against one another.
It is in times such as these that investors recognise we hold gold for both its insurance qualities and because during high risk political periods and weak stock markets gold has positively boosted overall returns.
This was shown in 2016 research carried out by Dr Lucey and Sile Le, which found that
“Political risk is found to be a positive and robust determinant across countries when precious metals are safe haven against stock and bond markets tail events.”
UBS’ advice to buy gold due to it’s role as a safe haven came on the same day as a successful nuclear missile test but they were mainly in reference to the ongoing development and growing uncertainty in the US about the political and economic outlook.
The US economy has, for obvious reasons, been the focus of gold market commentary for many years. At the moment analysts are looking at US job numbers, inflation rates, FOMC decisions and Trump’s impact as president. This is a somewhat blinkered, narrow form of analysis.
The Federal Reserve, US politics and the US economy are important drivers of gold’s price and role as a safe haven. But they are not the only drivers. Tail events which can negatively impact markets and risk assets such as stocks and bonds are usually rare but when they do occur they have a significant impact on the value of your investments and pension.
Unfortunately not only are these tail events becoming more frequent but they are also becoming more difficult to prepare for as the world becomes a far more fragmented and volatile place.
Much of the media tends to paint a picture of a world which is very US economy-centric and the U.S. remains the hegemon. This is no longer the case.
North Korea sits and taunts the US. The isolated nation may listen to Russia and China, but neither of them are particularly enamoured with the US right now. In the meantime you have the major GCC countries threatening Qatar with both political and economic sanctions which could lead to both humanitarian, economic and energy crises in the region.
This is merely the latest development in a region which has its own terrorism and nuclear concerns and a potential clash between Israel and Iran is another fuse which just needs a little spark to ignite the powder keg that is the Middle East.
Gold is the requisite insurance you hope you won’t need
There is a significant and growing consensus among academics, independent researchers and asset allocation experts that gold acts a hedging instrument and a safe haven asset. Read about the increasing consensus in academic research about gold’s role as a safe haven asset in our popular guide.
Understandably this might have been difficult to understand given gold’s poor performance in the last month but investors should look at this like they would any other form of insurance.
To own precious metals in bullion coin and bar format is to own a form of financial insurance.
The majority of people in the West realise the benefit of holding insurance for their car, their health and even their pets. They may complain about paying higher premiums but they pay them.
Given the price fall in recent days, prudent buyers are accumulating the insurance of physical gold at ‘lower premiums’.
This is because they see the necessity of insurance as it is there for them when a risk comes to fruition. They are not annoyed when they buy insurance and then do not need to use it instead they are happy in the knowledge that the security and peace of mind of owning insurance was there to be used should they need to.
Owning gold and the precious metals should be seen in a similar light. When you invest in a precious metal you will not receive an income from it and you will have to pay a slight premium for this added financial security.
Owning gold bullion as an investment or in your pension is simply the price you pay for proven financial insurance.
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